Russian crude’s unprecedented
premium to North Sea Brent is vanishing as European refiners
switch to higher-value blends and scale back purchases to
protect their profits.

Urals export blend for delivery in northwest Europe rose
above Dated Brent, the benchmark for two-thirds of the world’s
oil, for the first time in August, before dropping back below
Brent the past two days. It’s more likely to keep falling than
resume those gains in the coming month, according to the
majority of 13 oil traders surveyed by Bloomberg News.

“The Urals premium should be considered a temporary
phenomenon,” David Wech, head of research at JBC Energy GmBh, a
Vienna-based industry consulting firm, wrote in a report this
week. “Lighter grades are beginning to look cheap in
comparison” for refiners, he said.

The profit from cracking, or reprocessing, Urals blend in
northwest Europe dropped to $2.69 a barrel last week, the lowest
in almost a year, according to data compiled by Bloomberg. It
has averaged $6.94 a barrel in 2010. Europe Union countries
import 34 percent of their crude from Russia, data from the
European Commission show. Total SA, Royal Dutch Shell Plc and
Neste Oil Oyj are among refiners that process the Russian blend.

Nine of the traders surveyed by Bloomberg said they
expected Urals to keep declining, while three said prices will
remain little changed and one predicted they will rise before
dropping again. The poll was conducted Sept. 1.

Higher Sulfur Content

The Russian crude was at $75.85 a barrel today, 22 cents
below Dated Brent, Bloomberg data show. It rose as high as 5
cents above the benchmark on Aug. 31, compared with an average
of $1.51 a barrel below Brent this year.

The Urals grade has a higher sulfur content than many
grades, making it less attractive to refiners because of the
extra processing needed to remove pollutants and meet
environmental standards. It contains about 1.4 percent sulfur,
compared with 0.56 percent for Forties, the largest North Sea
blend.

Forties had a premium of 17 cents a barrel to Brent today,
compared with an average discount of 11 cents this year,
according to Bloomberg data.

Urals has jumped in the past three weeks, narrowing its
discount to Brent by $1.86, as declining shipments from Russia
created a shortage of prompt supplies and refiners faced
difficulties buying alternative crude from the Middle East.

Baltic Shipments

Shipments from the Baltic port of Primorsk will drop 3.7
percent in September, while tankers will load about 2 percent
less oil from Novorossiisk on the Black Sea, according to
loading plans obtained by Bloomberg News.

Russia is the biggest supplier of crude to Europe. The 27
members of the European Union imported about 3.7 million barrels
a day of the oil from the country in 2007, according to European
Commission data.

United Nations sanctions against Iran are making it harder
for European buyers to finance oil purchases from the Persian
Gulf nation, according to Wech. The UN Security Council imposed
a fourth set of sanctions June 9, curbing financial transactions
and tightening an arms embargo.

“Some of the Iranian grades are fairly close competitors
with Urals,” Julian Lee, a senior energy analyst at the London-
based Centre for Global Energy Studies, said yesterday. “A
knock-on effect of these sanctions is going to be greater
difficulties for European refiners buying Iranian crude.”

European imports of Iraq’s Kirkuk crude, another sour grade
that competes with Urals, have also been disrupted as supplies
via the Kirkuk-Ceyhan pipeline were halted for four days after a
bombing on Aug. 20.